may 31, 2019 - new york state senate · in a 2019 report produced by the pharmacists society of the...
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REPORT FROM THE NEW YORK STATE SENATE
COMMITTEE ON INVESTIGATIONS AND
GOVERNMENT OPERATIONS
CHAIR
SENATOR JAMES SKOUFIS
Final Investigative Report:
Pharmacy Benefit Managers in New York
MAY 31, 2019
This report was produced in coordination with the
COMMITTEE ON HEALTH CHAIR
Senator Gustavo Rivera
COMMITTEE ON INVESTIGATIONS AND
GOVERNMENT OPERATIONS
• CHAIR •
Senator James Skoufis
• COMMITTEE MEMBERS •
Senator Chris Jacobs
Senator Alessandra Biaggi
Senator David Carlucci
Senator Todd Kaminsky
Senator Andrew J. Lanza
Senator Luis R. Sepúlveda
• INVESTIGATIVE STAFF •
Sara DiBernardo, Esq.
Counsel Michael Mazzariello, Esq.
Chief Investigator
Contents I. Executive Summary ...................................................................................................... 2
II. Overview of Pharmacy Benefit Managers .................................................................... 7
III. Role of Pharmacy Benefit Managers in Rising Costs of Prescription Drugs ............. 10
IV. Investigatory Process and Report Findings................................................................. 22
IV.A. CVS Caremark ............................................................................................................ 23
IV.B. Express Scripts, Inc. .................................................................................................... 29
IV.C. OptumRx ..................................................................................................................... 33
V. Spread Pricing as a Revenue Scheme for Pharmacy Benefit Managers ..................... 38
VI. Oversight of Pharmacy Benefit Managers in New York State ................................... 49
VII. Other Investigatory Findings ...................................................................................... 54
VII.A. Buyout Letters and a Pattern of Impropriety ................................................................ 54
VII.B. Good Faith Discussions with Pharmacy Benefit Managers ........................................ 55
VIII. Conclusion and Recommendations ............................................................................. 55
VIII.A. Audit of New York Medicaid Managed Care Pharmacy Program ............................. 56
VIII.B. Increased Transparency in Prescription Drug Pricing ................................................ 60
VIII.C. Increased Transparency of Appeals in Public Health Law § 280-a ............................ 62
VIII.D. Licensing and Registration of Pharmacy Benefit Managers....................................... 62
VIII.E. Regulation of Mail Order Pharmacies ........................................................................ 63
VIII.F. Adequate and Transparent Reimbursement ................................................................ 65
VIII.G. Mandate All Reimbursements are Passed Back to Medicaid Clients ......................... 67
2
I. Executive Summary
Today, America’s healthcare system is characterized by escalating pharmaceutical list prices,
increasing out of pocket costs for consumers, and restricted access for patients. The healthcare
market has become increasingly intricate, with a myriad of different stakeholders dictating the
price of admission. A major player that has strained the contemporary healthcare system are
Pharmacy Benefit Managers or “PBMs”. Initially created to control drug costs and manage
prescription claims, PBMs have grown and consolidated so that only a handful of near-monopolies
with limited accountability dominate the drug market, giving them immense power to affect the
price of pharmaceuticals being paid by consumers and the State.
On January 9, 2019, Senator James Skoufis, Chair of the Senate Committee on Investigations
& Government Operations, in coordination with Senator Gustavo Rivera, Chair of the Senate
Committee on Health, opened an investigation into the practices of Pharmacy Benefit Managers
in New York. The purpose of the investigation was to better understand the impact PBM practices
have on New York State residents as well as delineate any legislative or regulatory
recommendations for further action. The primary target of the inquiry was to assess the role of
PBMs on rising prescription drug prices and declining patient’s access. This report serves as a
culmination of the investigatory findings and final recommendations.
To sufficiently evaluate the role of PBMs in rising prescription drug costs in New York State,
the Committee1 sent multiple information and document requests to the three largest national
1 Reference to the “Committee” within this report refers to the actions and opinions of a majority of
Investigation and Government Operations Committee members.
3
PBMs, CVS Caremark, Express Scripts Inc., and OptumRx.2 In these requests, the Committee
sought information and documents relating to industry practices and standard operating procedures
in order to evaluate what impact PBMs are having on prescription costs. The investigative team
held numerous meetings and discussions with representatives from the three PBMs regarding the
requests, investigatory scope, and potential voluntary actions by the PBMs to adjust industry
practices to better serve consumers.
Furthermore, the investigative team received information and documents from the New York
State Department of Health and the New York State Department of Civil Service to evaluate the
oversight—or lack thereof—of PBMs in New York State.3 Regrettably, the Committee determined
that both Departments have deficient oversight capabilities, leaving in question their ability to
adequately regulate the practices of PBMs.4
In an effort to conduct an objective investigation, the investigative team participated in
discussions with a myriad of interested stakeholders, including: independent and community
pharmacists, drug manufacturer trade groups, the Pharmaceutical Research and Manufacturers of
America (PhRMA), representatives from the Pharmacists Society of the State of New York
(PSSNY), lobbyists on behalf of the PBMs, and representatives from the PBMs themselves. In
order to understand the issues facing independent and community pharmacies throughout New
York, the team conducted multiple site visits to pharmacies and attended PSSNY’s annual
convention.
PBMs play an important but contentious role in the healthcare industry. Acting as
intermediaries between insurers, plan sponsors, drug manufacturers, pharmacies, and other
2 See infra IV.A.-IV.C. 3 See infra VI.A. 4 Id.
4
members of the healthcare industry, PBMs are primarily responsible for processing drug claims
for plan members, managing formularies, determining reimbursement rates for pharmacies, and
negotiating prescription drug prices with pharmaceutical manufacturers.5 Nationwide, PBMs are
now responsible for managing the pharmacy benefits for more than 266 million Americans with
health insurance.6
At their inception, PBMs were created to address the substantial upsurge in prescription drug
claims across the country. More recently, however, PBMs are under heightened scrutiny for
anticompetitive business practices that are adversely affecting health plan sponsors, patients, and
pharmacies. Rising prescription drug prices, complaints of increasing interference with patients’
access to medications, and decreasing pharmacy reimbursement rates that pharmacies consider
unsustainable bring the practices of PBMs into question.
Initially, numerous PBMs provided pharmacy benefit services for health plans across the
United States. Today, however, three PBMs—CVS Caremark, Express Scripts Inc., and
OptumRx—collectively control approximately 80 to 85 percent of the market. 7 As consolidation
of PBMs has increased, concerns about the influence and secrecy of their practices, have too,
intensified.8 The Committee believes the consolidation and vertical integration of PBMs has
contributed to skyrocketing list prices and declining patient access.
It is the opinion of the Committee that PBMs often employ controversial utilization and
management tools to generate revenue for themselves in a way that is detrimental to health plan
sponsors, patients, and pharmacies.9 Such practices include maximum allowable cost lists, direct
5 See infra II. 6 See infra II. 7 See infra II. 8 See infra II. 9 See infra III.
5
and indirect remuneration fees, rebates, formularies, and most controversially, spread pricing. The
Committee also found evidence that PBMs are undermining patient choice by forcing consumers
to use their preferred distributors, which are predominantly their own retail and mail order
operations.10
One of the key mechanisms by which PBMs generate revenue is through spread pricing.
Most commonly practiced on generic prescription drugs, the spread pricing model involves
charging plan sponsors one price for a prescription drug than what pharmacies are reimbursed for
dispensing that drug.11 The difference in the amount billed to the plan sponsor and the amount
reimbursed is the “spread,” which—if a positive margin exists—the PBM reaps as additional
profit.
Recently, PBMs have been exposed for using the spread pricing model to profit off state
Medicaid programs.12 In Ohio, PBMs have been accused by the Ohio Attorney General of
overcharging Ohio State Medicaid managed care by $224.8 million in spread fees from April 1,
2017 to March 31, 2018.13 Similarly, in Kentucky, PBMs pocketed $123.5 million in 2018 from
the state’s Medicaid managed care program. In Michigan, the Medicaid managed care program
was overcharged by an estimated $64 million for prescription drug claims over a two-year period.14
In a 2019 report produced by the Pharmacists Society of the State of New York, it is
estimated that New York Medicaid managed care organizations were overcharged by at least $300
million due to spread pricing of generic prescription claims.15 The Enacted Fiscal Year 2019-2020
budget banned the use of spread pricing in the State’s Medicaid Program.
10 See infra III. 11 See infra V.A.-V.C. 12 Id. 13 Id. 14 Id. 15 See infra V.
6
The Committee is concerned that a lack of transparency, oversight, and accountability of PBMs
has created an environment in which PBMs are able to engage in anticompetitive practices at the
detriment of consumers and pharmacists across New York State.16 As prescription drug costs
continue to rise, reimbursement rates are declining, forcing many rural and independent
pharmacies to permanently close their doors.
While the measures included in the 2019-2020 budget are beneficial, they must only be the
beginning. Prompt action is necessary to address rising prescription costs and declining patient
access. Legislation regulating questionable practices by PBMs is imperative. Specifically, the
Committee urges the Legislature to take action by (1) regulating the practices of spread pricing in
all pharmacy benefit contracts, (2) increasing the transparency of MAC appeals, (3) requiring the
licensing and registration of PBMs operating in New York to enhance accountability and
oversight, (4) prohibiting PBMs from mandating that patients use specialty and mail order
pharmacies, (5) providing for the adequate and transparent reimbursements for pharmacies and (6)
require PBMs to pass-through all discounts or rebates received from drug manufacturers to its
Medicaid managed care clients. Most importantly, this Committee urges the New York State
Comptroller to perform a full audit of New York’s Medicaid managed care programs to understand
the full effect PBMs—and spread pricing—has had on New York’s consumers. A comprehensive
audit of state Medicaid managed care dollars is urgently necessary.
16 See infra VIII.
7
II. Overview of Pharmacy Benefit Managers
Throughout the United States, healthcare providers—also referred to as plan sponsors—
predominantly contract with PBMs for the plan design and administration of prescription drug
benefits. PBMs contract with pharmacies or pharmacy contracting agents, referred to as Pharmacy
Services Administration Organizations (PSAOs), on behalf of a health plan, state agency, insurer,
managed care organization, or other third party payor to provide pharmacy benefit services.17 Plan
sponsors that utilize PBMs for their healthcare plans include commercial health plans, self-insured
employers, state government employee plans, Medicare Part D plans, and many more. Acting as
intermediaries between insurers and other members of the healthcare system, PBMs are primarily
responsible for negotiating prescription drug prices with pharmaceutical manufacturers,
processing drug claims, managing formularies, and negotiating reimbursement rates. Figure 1, on
the following page, illustrates a typical flow of products, services and funds between the primary
parties in the healthcare system.
17 N.Y. PUB. HEALTH LAW § 280-a(1)(a) (2019).
8
Figure 118
PBMs were established in the 1960s to address the unprecedented increase in prescription drug
claims that were overwhelming insurance companies, by serving as fiscal intermediaries
adjudicating the claims.19 Contemporary PBMs arose in the early 2000s, with the passage of the
Medicare Modernization Act in 2003.20
With the Medicare Modernization Act, the function of PBMs in America’s healthcare system
dramatically changed. As Medicare expanded to include prescription drug payments through its
Part D program, the role of PBMs expanded to implementing Part D by identifying patients,
reducing the administrative burden on plan sponsors, and formulating drug prices with
18 Sood, et al., The Flow of Money Through the Pharmaceutical Distribution System, USC SCHAEFFER
CENTER FOR HEALTH POLICY & ECONOMICS 2 (2017). 19 Judi Buckalew, Pharmacy Benefit Managers Play Significant Role in Pricing, AMERICAN ACADEMY OF
ORTHOPEDIC SURGEONS NOw (Oct. 2017). 20 Jessica Wapner, Understanding the Hidden Villain of Big Pharma: Pharmacy Benefit Managers,
NEWSWEEK (Mar. 17, 2017).
9
manufacturers by negotiating discounts and rebates.21 Initially, numerous PBMs were operating
within the American healthcare system, but due to consolidation and amalgamation, three PBMs—
CVS Caremark, Express Scripts, Inc. and OptumRx—collectively control an estimated 80 to 85
percent of the market, covering approximately 266 million Americans.22
At their onset, PBMs were established to reduce drug prices and increase patient access.
More recently, however, PBMs are under significant scrutiny for anti-competitive business
practices that are adversely affecting patients and independent pharmacists, including allegedly
driving up drug prices and interfering with patients’ access to medications.23
PBMs largely determine which pharmacies will be included in a pharmacy benefit plan’s
network and how much pharmacies will be paid for dispensing prescriptions.24 PBMs also
determine which medications will be covered by the plan—commonly referred to as a formulary—
and drug manufacturers often pay “rebates” to PBMs in order to get their drugs—and exclude
competitor’s drugs—onto those formularies.25
21 Id. 22 Buckalew, supra note 19. See also Frier Levitt, LLC, PBM DIR FEES COSTING MEDICARE AND
BENEFICIARIES: INVESTIGATIVE WHITE PAPER ON BACKGROUND, COST IMPACT, AND LEGAL ISSUES 1
(Jan. 2017) [hereinafter Frier Levitt]. 23 Wapner, supra note 20. 24 Per investigative teams’ discussions and interviews with pharmacists operating in New York State. 25 Id.
10
III. Role of Pharmacy Benefit Managers in Rising Costs of Prescription Drugs
The Committee finds that PBMs utilize procedures and policies to generate revenue that are
often detrimental to plan sponsors and pharmacies. PBMs primarily profit from (1) their own mail
order pharmacies; (2) providing services such as drug utilization review, rebate administration,
and data mining, and (3) negotiating with health plans, pharmaceutical manufacturers, and retail
pharmacies.26 PBMs use practices, such as maximum allowable cost lists, spread pricing, and
direct and indirect remuneration fees to generate profit, which leads to higher prices for clients and
consumers. Moreover, PBMs use practices that can undermine patient choice by forcing
consumers to use their preferred distributors, which are often their own retail and mail order
operations.27
III.A. Maximum Allowable Cost
A “maximum allowable cost” or “MAC” is a proprietary benchmark price set by PBMs for
therapeutically equivalent multiple source generic drugs.28 It designates the upper limit a plan will
pay for generic drugs and brand name drugs that have generic versions available.29 PBMs have
free reign to determine which products, and at what prices, are included on their MAC lists; there
26 Allison Garrett & Robert Garis, Leveling the Playing Field in the Pharmacy Benefit Management
Industry, 42 VAL. U. L. REV. 33, 36-37 (2007). 27 David Balto, Tackling High Drug Costs: Administration Works to Rein in Middlemen, Morning Consult
(June 6, 2018). 28 N.Y. PUB. HEALTH LAW § 280-a(1)(b) (2019). 29 The Need for Legislation Regarding “Maximum Allowable Cost” (MAC) Reimbursement, NATIONAL
COMMUNITY PHARMACISTS ASSOCIATION.
11
is no industry standard setting the criteria for determining which drugs are included on a MAC list
or the methodology of how PBMs establish the ultimate rate.30
Further, the pricing lists maintained by PBMs are not required to cover a pharmacy’s
operating costs, and can change without notice.31 Generally, MAC list rates are reviewed and
updated at least every seven calendar days.
Plan sponsors and pharmacies are usually not privy to the MAC determination process; in
some instances, pharmacists reported that they are compelled to blindly agree to contracts without
knowing the details of what is being agreed to.32 Contracted network pharmacies report being
uninformed as to how reimbursements—how much they will ultimately be paid—are calculated.33
Most plan sponsors report being unaware of how much revenue the PBM retains when the plan
sponsors pay for pharmaceuticals or pharmacy services because PBMs are not obligated to share
reimbursement information with their clients.34
Most states, including New York, have statutory requirements that mandate a
reimbursement appeal process for pharmacies. Appeals, however, are almost always denied
because a PBM has the unilateral ability to set the rates without any oversight from state agencies.35
30 Id. 31 Per investigative teams’ discussions and interviews with pharmacists operating in New York State. 32 Id. 33 Id. 34 Id. 35 Douglas Hoey, Allowable Cost Reimbursements Under Federal Healthcare Need Transparency, THE
HILL (Mar. 24, 2017).
12
III.B. Spread Pricing Model
PBMs also generate significant revenue from “spread pricing.” Most commonly practiced on
generic drug prescriptions, spread pricing involves charging plan sponsors more for a prescription
drug than what PBMs actually reimburse pharmacists for dispensing the drug.36 The difference in
the amount billed to a plan sponsor and the amount reimbursed to the pharmacy is where a PBM
is able to generate additional revenue. In 2018, Bloomberg examined the prices of best-selling
generic prescription drugs used by Medicaid, concluding that state insurance plans, including New
York, were paying millions of dollars in fees to PBMs via spread pricing tactics.37 For example,
in 2017, a 30-day supply of Aripiprazole cost $163 to New York Medicaid but only cost New York
pharmacies $21 to dispense. The $142 difference between the cost to the New York Medicaid and
the cost to the pharmacy is the spread.38 Figure 2, on the following page, depicts this. While this
analysis does not distinguish how the remaining $142 is divided between the pharmacies and the
PBMs, independent pharmacists interviewed by Bloomberg say the money is largely not going to
them.39
36 Robert Langreth et al., The Secret Drug Pricing System Middlemen Use to Rake in Millions, BLOOMBERG
(Sept. 11, 2018) [hereinafter The Secret Drug Pricing System Middlemen Use to Rake in Millions]. 37 Id. 38 Id. 39 Id.
13
Figure 240
PBMs also offer a pass-through model for pricing in contracts, which require a PBM to charge
a managed care plan the exact amount the PBM pays for prescriptions and dispensing fees.41 In
lieu of paying the spread to PBMs under the traditional model, plans under the pass-through
structure pay the PBM administrative fees for providing pharmaceutical services.
40 Id. 41 Thomas Beaton, OH Medicaid Adopts Pass-Through Model for Managed Care Drugs, HEALTH PAYER
INTELLIGENCE (Aug. 15, 2018).
14
III.C. Direct and Indirect Remuneration Fees
PBMs also use “direct and indirect remuneration” fees (“DIR”) to supplement their revenue.
The Centers for Medicare and Medicaid Services (“CMS”) initially created DIR fees upon the
enactment of Medicare Part D in order to track rebates and other price adjustments made to
PBMs.42 CMS contracts with various plan sponsors to administer Medicare Part D; these plan
sponsors in turn contract with PBMs to manage the pharmaceutical drug benefit of Medicare Part
D.43
PBMs are responsible for negotiating rebates from drug manufacturers as well as establishing
price adjustments that ultimately lower the overall drug costs for Medicare Part D plans.44 DIR
fees were designed as a way for CMS to track the annual amount of the rebates and price
adjustments for the purpose of accurately determining reimbursement on the lowest price.45
However, over time the purpose of DIR fees has considerably transformed. Today, DIR fees have
morphed into a “catch all” term used by PBMs to boost their profit.46 Examples of a DIR fee
include “costs for pharmacies to participate in a Part D preferred network, price reconciliations
based on contractual rates, and compliance fees for contract-based performance metrics.”47
Essentially, DIR fees are payments or payment adjustments made to PBMs after the point-of-sale
that alter the cost of Part D covered drugs.
42 Michael Gabay, Direct and Indirect Remuneration Fees: The Controversy Continues, 52(11) HOSP.
PHARM., 740, (Dec. 2017). 43 Id. 44 Id. 45 Id. 46 Id. 47 Id.
15
While DIR fees are not applicable to New York Medicaid managed care, uncertainty in fees
have significant impacts on pharmacies.48 Community and specialty pharmacies argue DIR fees
are essentially a means for PBMs to contractually “claw back” millions of dollars from pharmacies
on medications that are already dispensed.49 Typically, these fees are charged to pharmacies
months after the initial point-of-sale, and a lack of transparency in contract language hinders
pharmacies from accurately estimating how much will eventually be owed to the PBM.50
III.D. Rebates, Discounts and Price Concessions from Drug Manufacturers
On behalf of their clients, PBMs negotiate rebates with drug manufacturers through the use of
formularies and utilization management tools.51 Manufacturers set the list price for their
prescription drugs, and the PBMs negotiate price concessions for drugs dispensed to the
beneficiaries of its plan sponsor clients, in exchange for having their prescription medications
placed on a formulary. The Centers for Medicare and Medicaid Services (CMS) reported that
PBMs have been able to negotiate large rebates from drug manufacturers, which has contributed
to lower net costs.52 A 2018 study, funded by the Pharmaceutical Care Management Association
(PCMA),—the national association of PBMs—claimed that rebates in the Medicare Part D drug
48 Per investigative teams’ discussions and interviews with pharmacists operating in New York State. 49 Id. 50 Id. 51 Elizabeth Seeley and Aaron S. Kesselheim, Pharmacy Benefit Managers: Practices, Controversies, and
What Lies Ahead, THE COMMONWEALTH FUND, (Mar. 26, 2019). 52 Id.
16
plan saved beneficiaries $34.9 billion in premiums between 2014 and 2018.53 In some cases,
however, PBMs’ use of rebates has contributed to high pharmaceutical prices.54
PBMs negotiate with drug manufacturers to achieve the lowest net cost by securing
manufacturer discounts. Rebates are paid to PBMs after the point of sale, and can make up 40
percent or more of the drug’s list price.55 PBMs are not required to disclose information about
rebates with their clients, so while PBMs claim they pass much of the discount back to customers,
how much they choose to keep for themselves is generally concealed.
PBMs are partially reimbursed on the rebates they are able to negotiate with drug
manufacturers, which are calculated as a percentage of a drug’s list price.56 Critics contend this
system gives PBMs an incentive to prioritize high-price prescription drugs over drugs that are
more cost-effective.57 The incentive-based scheme is cited as an explanation for why tiering or
other utilization management strategies were used to favor brand name drugs over less expensive
drugs—such as generics—that are therapeutically similar.58 Consumers that have high-deductible
health plans may suffer from these prices.59
In effect, drug manufacturers are paying PBMs to increase the manufacturer’s market shares.
For example, two drug manufacturers may have similar but competing brand name drugs designed
to treat asthma. Manufacturers are able to offer financial incentives to PBMs, in the form of rebates
53 RANDALL FITZPATRICK & CHRIS CARLSON, PREMIUM IMPACT OF REMOVING MANUFACTURER
REBATES FROM THE MEDICARE PART D PROGRAM, OLIVER WYMAN 1, 2 (July 6, 2018). See also Michael
Ollove, Drug-Price Debate Targets Pharmacy Benefit Managers, THE PEW CHARITABLE TRUSTS (Feb. 12,
2019). 54 Seely & Kesselheim, supra note 51. 55 Id. 56 Id. 57 Id. 58 Id. 59 Id.
17
or discounts, for achieving sales targets.60 Moreover, PBMs may also receive rebates and discounts
for placing a manufacturer’s drug—and excluding its competition—on a formulary.61
III.E. Formularies
A formulary is a list of prescription drugs covered by a health plan’s pharmacy benefit design.
It dictates which drugs a health plan predetermines will be covered, and at what level, for
reimbursement under the terms of its pharmacy benefit plan. Formularies distinguish between
preferred or discouraged prescription drugs by dividing products into different “tiers,” designating
different levels of patient out of pocket costs.62 A formulary may cover both generic and brand
name prescription drugs.
Formulary selection involves an assessment of both the clinical and financial elements of a
prescription medication.63 Typically, PBMs employ Pharmacy and Therapeutics (“P&T”)
committees to assess and recommend formulary placement for individual drugs.64 These
committees are typically comprised of clinicians, pharmacists, medical professionals, legal
experts, and administrators.65 Formularies generally have two to five “tiers.” For example, a five-
tier formulary includes generic, preferred brand, non-preferred brand, preferred specialty drugs
and non-preferred specialty drug tiers.66 In addition to including therapeutic substitutions, a plan’s
60 Garett & Garis, supra note 26, at 44. 61 Id. 62 Cole Werble, Health Policy Brief: Formularies, HEALTH AFFAIRS 1 (Sept. 14, 2017) [hereinafter Health
Policy Brief: Formularies]. 63 Id. 64 Id. 65 Id. 66 Id.
18
formulary may require a patient to accept a generic substitution for the chemical equivalent of the
brand name drug.67
Pharmacy benefit plans may also use “open” or “closed” formularies. In an “open” formulary,
the plan sponsor pays a portion of the cost for all drugs, whereas in a “closed” formulary, the plan
sponsor does not cover any non-formulary drugs unless approved through a process.
Tier placement determines the amount a patient pays out of pocket for a prescription
medication at the point of sale.68 These costs are typically represented as coinsurance or copays.69
Coinsurance is a percentage of the full cost of a drug; copays are a fixed amount per prescription.70
Under this approach, the structure of the plan provides for lower out of pocket copays when
preferred drugs are used.71 In a three-tiered formulary copay structure, for example, a patient may
have to pay $10 for generic prescriptions, $15 for preferred brand name prescriptions, and $30 for
nonpreferred brand name prescriptions.72
Prescription drugs that are on a plan’s formulary often have lower copayment amounts, thereby
providing incentives to plan beneficiaries to obtain prescriptions included on the formulary, or
even on a lower tier, to reduce or eliminate their out of pocket costs.73 Thus, PBMs can steer
patients towards one prescription drug over another by making their out-of-pocket costs less
67 Per investigative teams’ discussions and interviews with pharmacists operating in New York State. See
also Garett & Garis, supra note 26, at 43. 68 Health Policy Brief: Formularies, supra note 62. 69 Id. 70 Id. 71 Garett & Garis, supra note 26, at 43. 72 Robert I. Garis et al., Examining the Value of Pharmacy Benefit Management Companies, 61 AM. J.
HEALTH-SYS. PHARMACISTS, 81, 82 (2004). 73 FEDERAL TRADE COMMISSION, PHARMACY BENEFIT MANAGERS: OWNERSHIP OF MAIL-ORDER
PHARMACIES 1, 6 (Aug. 2005) [hereinafter FEDERAL TRADE COMMISSION].
19
expensive.74 Therefore, the placement of prescription drugs on a formulary can increase profits for
the drug’s manufacturer.75
PBMs negotiate with drug manufacturers to provide preferred formulary placement for the
manufacturers’ products, in exchange for discounts, rebates, and incentives.76 This scheme has led
to contentions that PBM-negotiated manufacturer rebates cause PBMs to be more interested in
maximizing their rebates—which they receive a monetary portion of—than in minimizing a
payer’s prescription drug costs.77
Further, a recent study of Medicare Part D formularies found that PBMs might be creating
formularies that “encourage the use of more expensive branded drugs by assigning them fewer
utilization controls compared to generic equivalents.”78
Compliance with a plan’s formulary is crucial for a PBM because it demonstrates the ability
of a PBM to guide beneficiaries to obtain drugs on the formulary.79 High compliance is important
because it enables a PBM to show drug manufacturers that it “can induce use of formulary products
and increase their market shares.”80 PBMs utilize various strategies to ensure formulary
compliance, including generic substitution, therapeutic interchange, step-therapy and prior
authorization protocols.81
74 Michael Ollove, supra note 53. 75 FEDERAL TRADE COMMISSION, supra note 73, at 6. 76 Per investigative teams’ discussions and interviews with pharmacists, PBM representatives, and drug
manufactures. 77 Robert I. Garis et al., Examining the Value of Pharmacy Benefit Management Companies,61 AM. J.
HEALTH-SYS. PHARMACISTS, 81, 82 (2004). 78 Letter from U.S. Sen. Charles E. Grassley, Chairman, Senate Finance Committee and U.S. Sen. Ron
Wyden, Ranking Member, Senate Finance Committee to Timothy C. Wentworth, President, Express Scripts
and Cigna Services (Apr. 2, 2019), (citing Mariana P. Socal, Ge Bari & Gerald F. Anderson, Favorable
Formulary Placement of Branded Drugs in Medicare Prescription Drug Plans When Generics Are
Available, Research Letter, JAMA Internal Med. (Mar. 18, 2019)). 79 FEDERAL TRADE COMMISSION, supra note 73, at 6. 80 Id. at 7. 81 Id. at 12.
20
Generic substitution is the dispensing of a bioequivalent generic drug that contains the same
active ingredients, and is chemically identical in terms of strength, concentration, dosage, and route
of administration, to its brand-name drug.82 It generally occurs without prior physician
authorization when a beneficiary presents a prescription for a brand name drug and the pharmacy
dispenses it with a generic version of the product.83 Unless a state legally requires generic
substitution, where applicable, or a physician orders a prescription to be dispensed as written
(“DAW”), PBMs and pharmacists may have the discretion to substitute a generic drug for a brand
name drug without prior approval.84
Similarly, therapeutic interchange is the substitution of one drug for another in the same
therapeutic class.85 However, in therapeutic interchanges, the drug is substituted for a
therapeutically equivalent, but chemically distinct, drug product.86 The substitution can be brand
drug to brand drug or an interchange of a generic version of a therapeutically similar brand drug
for the prescribed brand drug.87 For example, in the latter scenario, generic Prozac is dispensed in
lieu of prescription Zoloft.88
PBMs have utilized step-therapy and prior authorization tools to lower prescription drug costs
and boost formulary compliance.89 In step-therapy programs, plans will pay for certain expensive
drugs only if a physician first prescribes at least one less expensive prescription or over-the-counter
drug first.90 Prior authorization requires that a physician or patient receive prior approval from the
82 Id. 83 Id. 84 Id. at 13. 85 Id. 86 Id. 87 Id. 88 Id. 89 Id. 90 Id.
21
PBM before certain non-preferred drugs are reimbursed by insurance.91 Typically, prior
authorization requires a clinical justification for the use of prescription drugs that are prone to
misuse or are more expensive.92
Prior authorization also enables PBMs to influence patients’ choices by requiring them to get
special permission from their health plan to use certain drugs or by requiring patients to try a less
expensive drug before being authorized to use the medicine initially prescribed by their
physician.93
III.F. Ownership of Retail and Mail Order Pharmacies
Many PBMs also profit by owning and operating their own retail and mail order pharmacies.
A PBM is “vertically integrated” if it owns a pharmacy, whether it is retail or mail order.94 A
vertically integrated PBM may have a greater ability to control which prescription drugs are
dispensed under the benefit plans it administers than a non-vertically integrated PBM.95 PBMs
mail order pharmacies typically fill and ship prescriptions that require a 90-day supply.96 CVS
Health, Express Scripts Inc., and OptumRx own and operate mail order pharmacy services.97
91 Id. at 13-14. 92 Id. at 14. 93 Michael Ollove, supra note 53. 94 FEDERAL TRADE COMMISSION, supra note 73. 95 Id. 96 Pharmacy Benefit Managers: Mail Order Services 101, NATIONAL COMMUNITY PHARMACISTS
ASSOCIATION. 97 See infra IV.A-C.
22
Vertical integration can have the ability to lower prescription drug costs by reducing
transaction costs and avoiding double markups.98 However, when a PBM administers the
pharmacy benefits for a client and sells prescription drugs to a client’s beneficiary (member) via
the PBM’s owned mail order pharmacy, the strong possibility of a conflict of interest arises.99 In
such a scenarios, PBMs have an opportunity to manipulate drug dispensing at their mail order
pharmacies to enhance their own profits at the expense of plans and its members.100
IV. Investigatory Process and Report Findings
To examine the role of PBMs in rising prescription drug costs in New York State, the
Committee sent multiple information and document requests to the three largest national PBMs,
CVS Caremark, Express Scripts Inc., and OptumRx. In these requests, the Committee sought
information and documents relating to industry practices and standard operating procedures in
order to evaluate what impact PBM’s are having on prescription costs. Furthermore, the
Committee held numerous meetings and discussions with representatives from the three PBMs
regarding the requests, investigatory scope, and potential voluntary actions by the PBMs to adjust
industry practices to better serve consumers.
The Committee specifically sought information and documentation relating to policies and
standard operating procedures utilized by PBMs to determine MAC (Maximum Allowable Cost)
98 FEDERAL TRADE COMMISSION, supra note 73. Double markups, or “double marginalization” occurs when
two independent, vertically related firms each have some ability to charge about the marginal cost. Id. 99 Id. 100 Per investigative teams’ discussions and interviews with pharmacists operating in New York State. See
also FEDERAL TRADE COMMISSION, supra note 73.
23
lists, drug coverage and formularies, administrative fees, spread pricing, reimbursement rates, and
MAC appeals.
IV.A. CVS Caremark
CVS Caremark is a subsidiary of CVS Health Corporation (“CVS Health”), which has more
than 9,900 retail locations, 1,100 walk-in medical clinics, serves 92 million pharmaceutical benefit
plan members, and provides specialty pharmacy services to consumers.101 CVS Health is currently
ranked seventh on the Fortune 500 list, with over $184 billion in annual revenue.102 For the three-
month period ending March 31, 2019, CVS Health reported a revenue of approximately $33.6
million for its pharmacy services.103 CVS Health and its subsidiaries provide pharmaceutical
benefits and clinical services to consumers. Of the 9,900 CVS pharmacy locations nationwide, 564
are pharmacies and retail stores located in New York.104
On November 28, 2018, CVS acquired Aetna, the nation’s third-largest health insurance
company and fourth-largest individual prescription drug plan insurer, for $69 billion.105 Aetna
managed over two million prescription drug plan members and earned a revenue of approximately
101 CVS Health Corp., Annual Report (Form 10-K) (Feb. 28, 2019). 102 FORTUNE 500. 103 CVS Health Corp., Quarterly Report 13 (Form 10-Q) (May 1, 2019). 104The Impact of CVS Health New York, CVS HEALTH. 105 Bruce Jaspen, CVS-Aetna Deal Closes With Vow to Change ‘Consumer Health Experience’, FORBES
(Nov. 28, 2018). See also Press Release, United States Department of Justice, Justice Department Requires
CVS and Aetna to Divest Aetna’s Medicare Individual Part D Prescription Drug Plan Business to Proceed
with Merger (Oct. 10, 2018) (on file with author).
24
$60 billion in 2017.106 The Department of Justice granted conditional approval of the merger of
CVS and Aetna as long as Aetna divested its private Medicare Part D prescription drug plans.107
Despite federal agency approval, the merger currently faces an antitrust challenge in the United
States District Court in the District of Columbia.108 The Court is reviewing the merger to determine
whether the deal violates the Antirust Procedure and Penalties Act, or the Tunney Act, a claim
asserted by many medical associations and consumer protection agencies.109
CVS Caremark maintains a national pharmacy benefit network of more than 68,000 retail
pharmacies, consisting of 41,000 chain pharmacies and 27,000 independent pharmacies.110
According to CVS Caremark’s January 30, 2019, response to the Committee’s information request,
CVS Caremark contracts with 5,023 pharmacies for the provision of pharmacy benefit services in
New York State.
CVS Caremark negotiates reimbursement rates with contracted pharmacies on behalf of its
clients; contracts are negotiated at the pharmacy, pharmacy chain, or pharmacy service
organization (‘PSAO”) level.111 Reimbursement is set by using the industry standard lesser-of
logic. Typically, reimbursement is the lesser-of (1) the “usual and customary” price, (2) submitted
ingredient cost plus a dispensing fee, (3) the contractual rate, or (4) MAC price.112 Some contracts
negotiated by CVS Caremark only use the lesser-of (1) the “usual and customary” price or (2) the
106 Press Release, United States Department of Justice, Justice Department Requires CVS and Aetna to
Divest Aetna’s Medicare Individual Part D Prescription Drug Plan Business to Proceed with Merger (Oct.
10, 2018) (on file with author). 107 Id. 108 Emily Baumgaertner, Judge Seeks Monitoring of CVS and Aetna During Antitrust Review, THE NEW
YORK TIMES (Dec. 18, 2018). 109 Kevin Curran, A Review of the Regulatory Hurdles Remaining for the CVS Aetna Acquisition, REAL
MONEY (May 1, 2019). 110 CVS Health Corp., Annual Report (Form 10-K) (Feb. 28, 2019). 111 Response from CVS Caremark to the New York State Senate Committee on Investigations and
Government Operations (Mar. 1, 2019). 112 Id.
25
contract rate or the MAC for generics on a MAC list.113 For brand drugs, CVS Caremark typically
sets the reimbursement rate as a percentage discount from AWP (Average Wholesale Price) plus
a dispensing fee.114
Independent pharmacies account for about 40 percent of CVS Caremark’s network of more
than 68,000 pharmacies across the United States.115 In determining its reimbursement rates, CVS
Caremark claims that independent pharmacies are reimbursed at a higher rate than larger regional
and national chains.116 Specifically, CVS Caremark asserts that “[i]ndependently-owned
pharmacies […] receive a fair and competitive reimbursement rate, that is generally higher than
the rate for national chain pharmacies in [its] network (including CVS Pharmacy).”117
As stated previously MAC prices specify the allowable reimbursement a PBM will allocate to
a pharmacy for dispensing a generic drug. CVS Caremark sets its MAC list and rates by reviewing
marketplace dynamics, product availability, and different pricing sources, including but not limited
to, Medi-span, wholesalers, MAC lists published by CMS, and retail pharmacies.118 CVS
Caremark’s MAC pricing often changes on a weekly basis, or more often, on a daily basis, if
needed.119
CVS Caremark uses MAC lists to provide pricing by individual generic drug, and may
express generic drug reimbursement as a discount from AWP plus a dispensing fee or MAC plus
113 Id. 114 Id. 115 Independent Pharmacies Play an Integral Role in Helping CVS Caremark Members Access Medications,
CVS HEALTH. 116 Id. 117 Our Maximum Allowable Cost (MAC) Pricing is a Commonly Used Tool to Manage Drug Costs, CVS
HEALTH. 118 Id. 119 Response from CVS Caremark to the New York State Senate Committee on Investigations and
Government Operations (Mar. 1, 2019).
26
a dispensing fee.120 Not all prescription drugs are subject to CVS Caremark’s MAC pricing; some
contracts have a Generic Effective Rate (GER), which is an average discount from AWP, and is
calculated on a periodic basis.121
As required by Public Health Law § 280-a, PBMs in New York are required to set forth a
MAC appeals process for pharmacies.122 From 2014 to 2018, the number of MAC appeal claims
for pharmacies participating in CVS Caremark’s networks increased from 5,646 claims to 340,611
claims, or by 5932.78 percent.123 However, the number of appeals approved only increased by
1093.57 percent. Pharmacies who have their MAC appeals denied are told “[p]rice remains based
on CVS Health’s review of current market price range.”124
YEAR CLAIM APPROVED DENIED PERCENT
APPROVED
PERCENT
DENIED
2014 5,646 1,337 4,309 23.7% 76.3%
2015 23,465 2,293 21,172 9.8% 90.2%
2016 43,787 2,606 41,181 6.0% 94.0%
2017 139,580 1,751 137,829 1.3% 98.7%
2018 340,611 15,958 324,653 4.7% 95.3%
120 Id. 121 Id. 122 See infra VI.A. 123 Response from CVS Caremark to the New York State Senate Committee on Investigations and
Government Operations (Mar. 1, 2019). 124 Id.
27
CVS Caremark creates a “formulary” that a client can adopt as part of its plan design or
opt to design its own. In determining the prescription drugs on its formularies, CVS Caremark
utilizes an independent panel of doctors, pharmacists and other medical experts to review and
approve the selection of drugs that meet the Company’s standards of safety and inclusion on one
of the Company’s template formularies.125 While not required to do so, many of CVS Caremark’s
clients choose to adopt a template formulary as part of their plan design.126
In contracts that utilize the traditional spread pricing model, CVS Caremark separately
negotiates rates with its clients for the provision of pharmacy benefit services and reimbursement
rates with pharmacies to dispense drugs to patients.127 In lieu of administrative fees, CVS
Caremark earns the “spread” between the price charged to its clients and the reimbursement paid
to pharmacies.128 CVS Caremark asserts the spread is used to cover its expenses for various
services, including clinical and customer support, programs to improve medication adherence, and
management of drug formulary and rebates. CVS Caremark claims that clients who choose the
spread pricing model receive greater price certainty on the costs of drugs, while it bears the
financial risk that it will not be able to negotiate prices below the levels contract with the client.
CVS Caremark also offers clients the pass-through model, in which the PBM negotiates
reimbursement rates with the pharmacies and clients pay those negotiated reimbursement rates. In
lieu of the spread paid to CVS Caremark, pass-through clients pay the PBM administrative fees
for providing pharmacy services. In the pass-through model, the administrative fees that PBMs
receive from clients are not tied to performance in negotiating lower drug prices.129
125 CVS Health Corp., Annual Report (Form 10-K) (Feb. 28, 2019). 126 Response from CVS Caremark to the New York State Senate Committee on Investigations and
Government Operations (Mar. 1, 2019). 127 Id. 128 Id. 129 Id.
28
CVS Caremark maintains contractual relationships with generic and brand name drug
manufacturers that provide for purchase discounts or rebates on drugs dispensed by pharmacies in
their network and by their specialty and mail order pharmacies.130 In 2018, CVS Caremark retained
two percent of its rebates from drug manufacturers, which is three percent of its annual earnings
per share of about $300 million.131 In December of 2018, CVS Health announced its new
“guaranteed net cost” model for pricing.132 The model guarantees the client’s average spend per
prescription, after any discounts, across each channel of distribution.133 Under the new pricing
model, CVS Caremark will pass through 100 percent of rebates to all government health programs,
commercial insurer and employer clients.134 Plan sponsors will then have the option to choose
whether and how to pass any rebates to their members.135
CVS Health also owns and operates mail order dispensing pharmacies and specialty mail
order pharmacies. Its specialty mail order pharmacies deliver advanced medications to individuals
with chronic or genetic diseases and disorders.136 CVS Health’s mail service dispensing
pharmacies also sell prescription drugs directly to consumers.137 For the three month period ending
on March 31, 2019, CVS Health received approximately $11.84 million in revenue from its mail
order dispensing and specialty mail order services.138
130 Id. 131 Bruce Japsen, Amid Drug Price Scrutiny, CVS Says Its PBM Retains Just 2% of Rebates, FORBES (Aug.
8, 2018). 132 Press Release, CVS Health, CVS Health Introduces New Approach to Pricing of Pharmacy Benefit
Management Services (Dec. 5, 2018). 133 Id. 134 Id. See also Bruce Jaspen, CVS to Return 100% of Drug Rebates Under New PBM Price Model, FORBES
(Dec. 5, 2018). 135 Deena Beasley, CVS Offers ‘Guaranteed Net Cost’ for Pharmacy Benefit Clients, REUTERS (Dec. 5,
2018). 136 CVS Health Corp., Annual Report 3 (Form 10-K) (Feb. 28, 2019). 137 CVS Health Corp., Quarterly Report 10 (Form 10-Q) (May 1, 2019). 138 Id. at 13.
29
IV.B. Express Scripts, Inc.
Express Scripts is a subsidiary of Cigna Corporation, an international health services
corporation with an adjusted revenue of $48 billion in 2018.139 On December 20, 2018, Cigna
acquired Express Scripts, the nation’s largest PBM, for $67 billion.140 Express Scripts offers
specialized pharmacy care, home delivery pharmacy services, retail network pharmacy benefits,
drug formulary management and specialty pharmacy services to its clients and plan members.141
Approximately 90 percent of all prescriptions filled by Express Scripts are generic medications.142
Express Scripts currently manages drug benefits for more than 80 million Americans, including
those enrolled in union-sponsored plans, state employee health plans, and public purchasers.143
Over 67,000 retail pharmacies across the United States participate in one or more of Express
Scripts’ contracted pharmacy benefit networks.144 In 2017, Express Scripts adjudicated over 877
million claims through those pharmacies.145 Per Express Scripts’ February 27, 2019, response to
the Committee’s information request, it contracts with approximately 5,000 pharmacies for the
provision of pharmacy benefit services in New York State.
There is no fee for pharmacies to participate in Express Scripts’ networks. However, before a
pharmacy can participate in their network, they must go through a credentialing process, for which
139 2018 Annual Report, CIGNA (Mar. 2019). 140 Joe Cooper, Cigna Closes $67B Express Scripts Purchase, HARTFORD BUSINESS (Dec. 20, 2018). See
also Cigna Corp., Annual Report (10-k) (Feb. 28, 2019). 141 2018 Annual Report, CIGNA (Mar. 2019). 142 Drug Pricing in America: A Prescription for Change, Part III: Before the S. Committee on Finance,
116th Cong. 7 (2019) (testimony of Steve Miller, M.D., Executive Vice President and Chief Clinical
Officer, Cigna Corp.). 143 Response from Eric W. Sitarchuk on behalf of Express Scripts Inc., to the New York State Senate
Investigations and Government Operations Committee (Feb. 27, 2019). 144 Id. 145 Id.
30
Express Scripts charges a credentialing fee.146 For every transaction a network pharmacy transmits
to Express Scripts, it charges a service fee in accordance with its agreements.147 The amount of the
fee is negotiated by pharmacies, and varies pharmacy to pharmacy.
Express Scripts reimburses pharmacies for dispensing drugs to its clients in accordance with
their network provider agreements. Reimbursement is the lesser of the following: “average
wholesale price (AWP) of the product ingredient cost, less the contracted discount, plus the
applicable contracted dispensing fee […]; the pharmacy’s submitted ingredient cost plus
applicable contracted dispensing fee; the pharmacy’s usual and customary retail price (U&C);
MAC […] plus the applicable contracted dispensing fee.”148 Brand drug reimbursement is
generally a percentage discount off an industry benchmark. Generic drug reimbursement is
frequently determined by MAC, or a discount off of AWP.
Express Scripts uses multiple sources in evaluating MAC pricing, including at least one
nationally recognized pricing service and pricing from at least one drug wholesale or
manufacturer.149 MAC price lists are reviewed at least every seven days. 150 It updates prescription
drugs on the MAC list based on market conditions and product availability.
As required by Public Health Law § 280-a, Express Scripts permits network pharmacies to
appeal reimbursements determined by MAC prices. MAC appeals are limited to 30 days following
the initial claim or payment. Appeals within the scope of § 280-a are investigated and responded
to within seven calendar days. According to its response, between 2014 and 2018, approximately
146 Response from Eric W. Sitarchuk on behalf of Express Scripts Inc., to the New York State Senate
Investigations and Government Operations Committee (Feb. 27, 2019). 147 Id. 148 Id. 149 Id. 150 Id.
31
0.02% of claims in New York were appealed.151 Although the Committee requested it, Express
Scripts did not provide specific appeals data.
Express Scripts uses three distinct committees—the Therapeutic Assessment Committee, the
Pharmacy and Therapeutics Committee, and the Value Assessment Committee—to determine
which prescription medications are to be included on a formulary. The first two committees use
only clinical considerations in determining approved medications, but the Value Assessment
Committee utilizes both clinical and financial considerations.152 While Express Scripts may create
the formulary, a client is responsible for adopting, or choosing a formulary for its pharmacy
benefits program. Clients also have the option to create their own formularies. Express Scripts
clients may choose “open” or “closed” formularies.
In its response, Express Scripts informed the Committee that it does not have a policy or
procedure with respect to price spreading for prescription drugs.153 However, clients whose
members fill prescriptions at pharmacies within its networks pay Express Scripts for those filled
prescriptions; if the rate paid by a client exceeds the reimbursement rate contracted with the
pharmacy, Express Scripts retains the positive margin—also commonly referred to in the industry
as the spread.154 Express Scripts also utilizes the pass-through model for contracts, in which the
client pays the ingredient cost and dispensing fee paid by Express Scripts to the pharmacy for a
particular claim.
Express Scripts, like other PBMs, negotiates rebates for prescription drugs dispensed to
beneficiaries of its plan sponsor clients. Express Scripts claims that it returns on average 90
151 Response from Eric W. Sitarchuk on behalf of Express Scripts Inc., to the New York State Senate
Investigations and Government Operations Committee (Feb. 27, 2019). 152 Id. 153 Id. 154 Id.
32
percent of the rebates it negotiates with drug manufacturers to its clients.155 According to a
financial disclosure to the United States Securities and Exchange Commission, Express Scripts
retains approximately $400 million in rebates per year.156
In November of 2018, Express Scripts announced a new formulary that will favor lower-cost
generics rather than expensive, brand name versions.157 In an effort to normalize rebates in the
marketplace, the new “National Preferred Flex Formulary,” was designed to encourage drug
manufacturers to move away from paying rebates after a prescription is filled.158 Express Scripts’
chief medical officer, Steve Miller, stated the new formulary may appeal to plan sponsors “seeking
to reduce out-of-pocket costs and reliance on brand rebates.”159 This allows clients to choose
between formularies that include drugs with a high list price—and high rebate—or their new list
with lower drug prices, but with little or no rebate.160 However, others in the pharmaceutical
industry remain hopeful that it will cause a pharmaceutical company to lower their brand name
drug prices.161
Cigna, through Express Scripts, operates four automated mail order dispensing pharmacies and
seven specialty home delivery pharmacies throughout the United States.162 In its annual report to
the Securities Exchange Commission, Cigna claims that through its mail order (home delivery)
services, it was able to reach “a higher level of generic substitutions, therapeutic interventions and
155 Lets Talk About Rebates, EXPRESS SCRIPTS (May 15, 2018).. 156 Cigna Reiterates Support for Proposed Merger with Express Scripts, CIGNA (Aug. 2018). 157 Deena Beasley, Express Scripts Offers New Formulary for Lower List-Price Drugs, REUTERS (Nov. 13,
2018). 158 Id. 159 Id. 160 Paulina Firozi, The Health 202: Express Scripts Takes on Rebates in Plan it Says Will Lower Drug
Prices, THE WASHINGTON POST (Nov. 19, 2018). 161 Id. 162 Cigna Corp., Annual Report 9 (Form 10-K) (Feb. 28, 2019).
33
better adherence than is achieved through retail pharmacy networks.”163 However, Cigna also
stated that its home delivery generic fill rate is lower than the network generic fill rate because
fewer generic substitutions are available among medications treating chronic conditions, which
are commonly dispensed from home delivery pharmacies.164 Its specialty pharmacy services
predominantly treat complex diseases that generally require frequent dosing adjustments, intensive
clinical monitoring and specific administration requirements.165 For the three month period ending
on March 31, 2019, Cigna had approximately $11.78 million in revenue for its home delivery and
specialty services.166
IV.C. OptumRx
OptumRx is a company within Optum, a subsidiary of UnitedHealth Group. In 2018, Optum
and UnitedHealth Group earned a revenue of over $101.3 billion and $226 billion, respectively.167
OptumRx provides pharmacy care services to over 65 million people in the United States through
its network of more than 67,000 retail pharmacies, home delivery services, specialty and
compounding pharmacies, and home infusion services.168 OptumRx provides pharmacy care
services to 250,000 patients each day.169 In 2018, OptumRx managed $91 billion in pharmaceutical
163 Id. at 10. 164 Id. 165 Id. at 58. 166 Cigna Corp., Quarterly Report 42 (Form 10-Q) (May 2, 2019). 167 News Release UNITEDHEALTH GROUP (Jan. 15, 2019). 168 UnitedHealth Group Inc., Annual Report (Form 10-K) 7 (Feb. 12, 2019). 169 Drug Pricing in America: A Prescription for Change, Part III: Before the S. Committee on Finance,
116th Cong. 1 (2019) (testimony of John. M. Prince, Chief Executive Officer, OptumRx).
34
spending, and fulfilled 1,343 million adjusted scripts.170 OptumRx had a reported revenue of $69
billion in 2018, a growth of 9.1 percent, or $5.8 billion, compared with 2017.171 OptumRx currently
contracts with 4,998 pharmacies in New York, including more than 2,500 independent
pharmacies.172
In its response to the Committee, OptumRx stated it reimburses pharmacies based on
“competitive rates that balance the need to fairly compensate pharmacies with providing a cost-
effective benefit for [its] plan customers and their members.” Reimbursement is generally set at
the lesser of (1) provider’s customary charge, less any patient expenses; or (2) the fee schedule
amount, less any patient expenses.173
Network pharmacies are assessed a credentialing fee and a per transaction administration
fee.174 For chain pharmacies and pharmacies that participate in PSAOs, the credentialing fee is
waived. OptumRx retains both the administrative and credentialing fees, per contractual client
agreements.175
OptumRx determines MAC pricing based on a review of (i) pricing information from a
nationally recognized pricing service; (ii) at least one national drug wholesaler and/or
manufacturer; and (iii) publicly available results of CMS’ survey of retail prices (NADAC).176
OptumRx reviews MAC prices at least every seven days, and updates its lists as needed.177
170 UnitedHealth Group Inc., Annual Report (Form 10-K) 7, 29 (Feb. 12, 2019). 171 News Release UNITEDHEALTH GROUP (Jan. 15, 2019). 172 Response from Natalie A. Pons, General Counsel, OptumRx to the New York State Senate
Investigations and Government Operations Committee (Mar. 11, 2019). 173 OptumHealth Care Solutions, LLC Provider Operations Manual, OPTUM 16 (Mar. 2019). 174 Response from Natalie A. Pons, General Counsel, OptumRx to the New York State Senate
Investigations and Government Operations Committee (Mar. 11, 2019). 175 Id. 176 Id. 177 Id.
35
Since March of 2016, OptumRx has received approximately 673,688 MAC appeals from
pharmacies participating in its networks; approximately 69,230 appeals, or 10.2 percent received
a rate change, but 604,459 appeals were denied, or 89.8 percent.178 In 2017 and 2018, OptumRx
received 155,328 and 363,834 MAC appeal claims, respectively.179 The total number of MAC
appeal claims skyrocketed approximately 42.7% in 2018 from 2017.180 Of the approximate
155,328 appeals, OptumRx reviewed in 2017, it granted 6,799, or 4.4% rate changes, but denied
148,529, or 95.6 percent.181 In 2018, OptumRx approved a rate change in 53,885, or 14.8 percent
of its claims, denying a total of 309,949, or 85.2 percent.182
Like most PBMs, clients of OptumRx retain the authority to design and administer their own
plan, including the contents of the plan’s formulary. OptumRx also offers standard formularies
that are derived from clinical input driven by an independent Pharmacy & Therapeutic Committee
(P&T).183 OptumRx’s P&T Committee is comprised of independent practicing physicians and
pharmacists who use clinical and financial data to evaluate which drugs should be included on a
formulary.184 Clients may choose to formulate their own or adopt one of the standard formularies
for their plan design.185
OptumRx offers clients the option to choose between different pricing models for its pharmacy
benefit services, including the spread pricing model and the pass-through model. The impact
spread pricing has on rising drug costs is also impacting beneficiaries whose plan sponsors contract
178 Response from Natalie A. Pons, General Counsel, OptumRx to the New York State Senate
Investigations and Government Operations Committee (Mar. 11, 2019). 179 Id. 180 Id. 181 Id. 182 Id. 183 OptumRx National Pharmacy and Therapeutics Committee, OPTUMRX (2018). 184 Id. 185 Response from Natalie A. Pons, General Counsel, OptumRx to the New York State Senate
Investigations and Government Operations Committee (Mar. 11, 2019).
36
with OptumRx and UnitedHealth for pharmacy benefit services. For example, a patient’s copay
for three-month supply of generic Crestor cost $83.94 to fill at a local Walgreens using
UnitedHealth insurance, whereas the same generic medication only cost $45.89 for a three-month
supply from Blink Health, a pharmacy services startup.186
Similar to other PBMs, OptumRx negotiates discounts and rebates from drug manufacturers.
OptumRx asserts its clients receive approximately 98 percent of the value of rebates and discounts
negotiated from drug manufacturers.187 OptumRx stated that, in an attempt to mitigate the impact
of list price increases, it also negotiates price protection guarantees in its agreements with drug
manufacturers, which requires manufacturers to pay penalties in the form of additional discounts
when they increase a drug’s list price beyond an established threshold. Further, in 2018, OptumRx
implemented a point-of-sale discount for fully insured group customers; through this program,
consumers receive the discount benefit at the pharmacy counter.188 In March of 2019, OptumRx
announced it will extend the discount benefit to all new employer-sponsored plans beginning in
January of 2020.189
OptumRx also provides home delivery and specialty pharmacy services to its clients’
members.190 As of December of 2018, OptumRx operated four home delivery pharmacies and 70
specialty and infusion pharmacies throughout the United States.191 Its specialty and infusion
186 Charles Ornstein and Katie Thomas, Prescription Drugs May Cost More With Insurance Than Without
It, THE NEW YORK TIMES (Dec. 9, 2017). 187 Drug Pricing in America: A Prescription for Change, Part III: Before the S. Committee on Finance,
116th Cong. 3 (2019) (testimony of John. M. Prince, Chief Executive Officer, OptumRx). 188 Id. 189 Id. 190 UnitedHealth Group Inc., Annual Report (Form 10-K) 7 (Feb. 12, 2019). 191 Id.
37
pharmacy services include the delivery of advanced medications for chronic or genetic diseases
and disorders.192 In 2018, OptumRx managed $40 billion in specialty pharmaceutical spending.193
However, Ohio State Attorney General Dave Yost found that between 2015 and 2018
OptumRx failed to pass on discounts to Ohio’s Bureau of Workers’ Compensation, totaling $15.8
million in pharmacy overcharges.194 Attorney General Yost asserted that OptumRx failed to
manage its clients MAC list to achieve promised discounts and wrongfully increased prices
charged to the client.195 This past March, Attorney General Yost filed a lawsuit against OptumRx
seeking at least $15 million in compensatory damages and $15 million in punitive damages.196 The
suit alleges that OptumRx breached its contract with the Ohio Bureau of Workers’ Compensation
by failing to provide a guaranteed discount on generic drug pricing, misusing information for
commercial purposes, and through use of fraudulent misrepresentations in the course of its efforts
to secure the contract.197
192 Id. 193 Id. 194 Letter from Dave Yost, Ohio Attorney General, to Ellen Nelson, OptumRx Administrative Services,
LLC (Feb. 11, 2019). 195 Id. 196 Nate Raymond, Ohio Accuses UnitedHealth’s OptumRx of Drug Overcharges in Lawsuit, REUTERS
(Mar. 18, 2019). 197 Complaint, Ohio Bureau of Workers’ Compensation et al. v. OptumRx Administrative Services LLC, No.
19CVS002263 (Ohio Com.Pl. filed Mar. 15, 2019).
38
V. Spread Pricing as a Revenue Scheme for Pharmacy Benefit Managers
V.A. Spread Pricing Model Overview
As previously mentioned, one of the key mechanisms by which PBMs generate revenue is
through spread pricing. In a generic drug transaction, the buyer—a plan sponsor—has a contract
with a PBM that specifies that the managed care organization will pay a discount to the average
wholesale price (AWP) for a prescription medication claim.198 The seller—a pharmacy—has a
contract with a PBM that specifies that it will receive MAC plus a fee for dispensing the same
prescription medication claim.199 In the generic drug transaction, there are now two prices for the
same prescription medication on either side of the transaction.200 If there is a difference in the two
prices, the gap constitutes the “spread.”
The rates for AWP and MAC are not products of a competitive market place. Rather, the AWP
of a generic prescription drug is set by the drug manufacturer, which has an incentive to keep the
drug cost artificially high, while the discount to the AWP for a transaction is set by the PBM.201
MAC, as mentioned above, is a proprietary benchmark solely determined by the PBM.202 Since
AWP and MAC are not set by a prevailing market rate, PBMs have tremendous latitude to control
and set the spread.203
198 3 AXIS ADVISORS, ANALYSIS OF PBM SPREAD PRICING IN NEW YORK MEDICAID MANAGED CARE 8
(Jan. 17, 2019) [hereinafter 3 AXIS ADVISORS]. 199 Per investigative teams’ discussions and interviews with pharmacists operating in New York State. 200 Id. 201 3 AXIS ADVISORS, supra note 198, at 8. 202 Id. 203 Id.
39
V.B. Spread Pricing in State Medicaid Managed Care Programs
Throughout the United States, reports have shown PBMs using spread pricing to profit off state
Medicaid programs. A recent report conducted by the Ohio State Auditor found that Ohio
Medicaid managed care paid PBMs $224.8 million due to the spread alone from April 1, 2017 to
March 31, 2018.204 The $224.8 million in spread retained represents 8.9 percent of the total $2.5
billion Ohio paid to each of the five Medicaid managed care plans.205 PBMs retained $208.4
million dollars (31.4 percent) of $662.7 million spent on generic drugs, $9.8 million (0.8 percent)
of $1.25 billion spent on brand name drugs, and $6.6 million dollars (1.1 percent) of $617.7 million
spent on specialty drugs.206 The audit determined the overall average spread was $5.71 per
prescription, however for generic drugs—which comprises more than 86 percent of all
prescriptions—the spread was higher, at $6.14 per prescription.207 Of the five Medicaid managed
care plans in Ohio, OptumRx contracts with one, and CVS Caremark contracts with the remaining
four.208 Of the approximate $225 million paid in spread, CVS retained approximately $196 million
and OptumRx approximately retained $29 million.209
In response to the Auditor’s findings, the Ohio Department of Medicaid sent letters to the
state’s five managed care plans, directing them to terminate contracts with PBMs that use the
204 DAVE YOST, AUDITOR OF STATE OF OHIO, OHIO’S MEDICAID MANAGED CARE PHARMACY SERVICES
2 (Aug. 16, 2018). 205 Id. at 24. 206 Id. at 2. 207 Id. 208 Id. at 8. 209 Id. at 2.
40
spread pricing model and negotiate new contracts utilizing the pass-through pricing model before
January 1, 2019.210
In Kentucky, a report produced by the Kentucky Cabinet for Health and Family Services
determined that in 2018, PBMs pocketed $123.5 million from the state’s Medicaid managed care
organizations.211 The spread per prescription averaged $8.70 in 2018, a 43.3 percent increase from
2017, which averaged $6.07 per prescription.212 Of the five managed care organizations that
contract with Kentucky’s Department of Medicaid Services, four contract with CVS Caremark and
one contracts with Express Scripts, for their pharmacy benefit services.213
In Indiana, Bloomberg determined that the State’s four privately run Medicaid plans averaged
more than $13 per prescription in 2017, significantly more than any other State managed care plan
reviewed.214 Further, in 2017, Indiana’s private Medicaid plans spent more than $800 for a 30 day
supply of Entecavir, a hepatitis B pill that cost pharmacies less than $140 to purchase.215 Indiana’s
Medicaid plans spent more than $100 per prescription for generic versions of Nexium, a heartburn
drug, which cost less than $25 to purchase in late 2017.216 Importantly, pharmacists in Indiana
state they are receiving only a small amount of the prescription drug markup.217
210 Kaitlin Schroeder, UPDATE: Pharmacy Middlemen Could Lose Billions in Ohio Medicaid Contracts,
DAYTON DAILY NEWS (Aug. 14, 2018). See also Catherine Candisky & Lucas Sullivan, Ohio Ends Deals
With Pharmacy Middlemen That Costs Million, THE COLUMBUS DISPATCH (Aug. 14, 2018). 211 MEDICAID PHARMACY PRICING OPENING THE BLACK BOX, KENTUCKY CABINET FOR HEALTH AND
FAMILY SERVICES 5 (Feb. 19, 2019). 212 Robert Langreth, Drug Middlemen Took $123.5 Million in Hidden Fees, State Claims, BLOOMBERG
(Feb. 21, 2019). 213 MEDICAID PHARMACY PRICING OPENING THE BLACK BOX, KENTUCKY CABINET FOR HEALTH AND
FAMILY SERVICES 3 (Feb. 19, 2019). 214 The Secret Drug Pricing System Middlemen Use to Rake in Millions, supra note 36. 215 Id. 216 Id. 217 Id.
41
Wapello County in Iowa now purchases its prescription drugs for its jails directly from a
pharmacy after discovering that it was paying CVS Caremark more than $4,500 a month, while
CVS Caremark was only reimbursing the pharmacy approximately $1,500.218
In Michigan, a report conducted by the Michigan Pharmacists Association concluded that over
a two-year period, state Medicaid managed care was overcharged by at least $64 million for
prescription drug claims.219 Furthermore, the report found that in the two-year period, the spread
margin on oral solid generic prescription drugs increase from two percent of the managed care
program’s costs to more than 34 percent.220 In early 2018, Michigan pharmacies were being
reimbursed only five percent of the average $10.64 costs involving in purchasing and dispending
prescription drugs.221
V.C. Spread Pricing in New York State Medicaid Managed Care
In a recently commissioned report by the Pharmacists Society of the State of New York
(PSSNY)222 it is estimated that in 2017, New York Medicaid managed care spent nearly $1.3
218 Id. 219 Press Release, Michigan Pharmacists Association, New Report Highlights Role of Pharmacy Benefit
Managers in Manipulating Drug Costs for Michigan Patients, Pharmacists and Taxpayers (Apr. 29, 2019). 220 3 Axis Advisors, Analysis of PBM Spread Pricing in Michigan Medicaid Managed Care 1 (Apr. 2019). 221 Larry Wagenknecht, Opinion: Transparency Drives Down Drug Costs, THE DETROIT NEWS (May 22,
2019). 222 The study was based on connecting generic drug spending data reported by New York Medicaid
managed care as part of CMS’ State Utilization Database with pharmacy reimbursement data collected
from a geographically diverse sample of 11 community pharmacies. The report also obtained
reimbursement information on the NDC level and CMS’ NADAC database. All three databases were used
to study the difference between state cost, pharmacy reimbursements, and pharmacy cost on both an
aggregated basis for all generic drugs, and an individual basis for selected generic drugs over the study
time period. The study relied only on community pharmacy reimbursement data; Publishers did not have
access to chain pharmacy reimbursement information.
42
billion on generic drugs, which is more than any other state managed care program in the United
States.223
To estimate the nature and extent of spread pricing in New York Medicaid managed care,
the report analyzed nearly 170,000 generic oral solid prescriptions dispensed between January 1,
2016 and March 31, 2018.224 The report publishers compared pharmacy unit revenue to publicly
available datasets from the Centers for Medicare & Medicaid Services (CMS) that measure state
drug costs, or State Utilization Data, and pharmacy acquisition cost, or National Average Drug
Acquisition Costs (NADAC).
For generic solids included in its analysis, the report found that while the PBMs were
increasing New York State’s relative generic drug prices, they were simultaneously reducing
pharmacy margins, resulting in a substantial increase in spread.225
223 3 AXIS ADVISORS, supra note 198. $6.7 billion combined for generic and brand name drugs. The study
was commissioned and funded by the Pharmacists Society of the State of New York (PSSNY) for the
purpose of evaluating the nature and extent of spread pricing within the New York Medicaid managed care
program. Id. 224 Id. Generic oral solids include, but are not limited to, tablets and capsules. 225 Id. at 13.
43
Figure 3226
As illustrated above in figure 3, in Quarter 1 (Q1) of 2016, New York Medicaid managed
care paid an average of $0.375 per unit of generic drugs in the dataset, while pharmacies, on
average, received $0.378 per unit, virtually the same amount, resulting in no spread for that
quarter.227 In Q4 of 2017, the State’s cost per unit rose to $0.382, however, the pharmacy revenue
per unit was cut 38% to $0.234 per unit. While it may appear to be insignificant per unit, the
decrease in pharmacy reimbursement for Q4 2017 resulted in an 83% reduction when compared
226 3 AXIS ADVISORS, supra note 198 at 15. 227 Id.
44
to Q1 in 2016.228 Furthermore, in Q4 for 2017, the average PBM spread, or profit, was $0.148 per
unit, or $5.62 per prescription.229
The chart below, figure 4, presents a different view of same results for the PBM spread on
generic oral solids data.
Figure 4230
The height of the stacked bars in figure 4 increased from just over $3.00 per prescription
in Q1 2016 to more than $6.00 in Q4 2017, showing that PBMs doubled the “markup” charged to
228 3 AXIS ADVISORS, supra note 198. 229 Id. 230 Id. 13. NY Managed Care Medical Markup Per Prescription – All Generic Oral Solids.
45
New York State for its Medicaid managed pharmacy benefits.231 Furthermore, figure 4
demonstrates that while PBMs were increasing New York State’s relative generic drug prices, they
were simultaneously reducing pharmacy margin (orange), resulting in a substantial increase in the
spread (blue), or their profit.232 The PBMs did not contest the findings of the PSSNY report when
the Committee gave them the opportunity to do so.
V.D. Case Study: Aripiprazole 5 mg Tablet
The report commissioned by PSSNY also included a spread pricing case study of generic
Abilify, Aripiprazole. Abilify, and its generic Aripiprazole, are antipsychotic drugs commonly
prescribed to treat schizophrenia, bipolar disorder, and Tourette syndrome.233
In 2012, a decade after receiving approval from the U.S. Food and Drug Administration,
Abilify was generating over $2.5 billion per year worldwide.234 In 2014, New York Medicaid spent
over $206 million on all strengths of brand name Abilify.235 Of the total $206 million, New York
spent $46 million, before rebates, to purchase 1.78 million Abilify 5mg tablets, for an average cost
of $25.85 per tablet, which at the time was nearly identical to the wholesale average cost (WAC),
of $25.88 per tablet.236 In April 2015, after Abilify’s patent expired, four different manufacturers
231 3 AXIS ADVISORS, supra note 198. 232 Id. 233 Id. at 9. 234 Id. 235 Id. 236 Id.
46
brought its generic, Aripiprazole, to market.237 In December of 2018, twelve different
manufacturers produced Aripiprazole, driving down the acquisition cost to $0.33 per tablet.238
However, market-based acquisition costs are not factored into a transaction for generic
prescriptions because PBMs are allowed to set and capture pricing spreads through their
contractual agreements with clients.239 Despite the steep decline in the actual cost of Aripiprazole
5mg, its average wholesale price (AWP) has remained constant around $32.50 per tablet.
Therefore, the AWP for Aripiprazole 5mg is a staggering 98 times greater than its market-based
acquisition cost.240
Using CMS’s utilization data, figure 5, on the following page, shows the relationship
between what New York managed care actually paid for Aripiprazole 5mg, and its acquisition
cost, as determined by NADAC, for the period 2016 through 2018. For example, in Q1 of 2016,
New York managed care paid an average of $14.01 per Aripiprazole 5mg tablet, while a
pharmacy’s typical acquisition cost was only $7.03 per tablet.241 Importantly, the chart depicts that
the price New York managed care pays for Aripiprazole 5mg appears to be arbitrary; the price
does not change concurrently with changes in acquisition costs, but instead appears to “reset” in
Q1 of 2017. Despite the price reductions beginning in Q1 2017, New York still paid $3.74 per
tablet in Q1 of 2018, which is more than 7.5 times Aripiprazole 5mg’s acquisition cost.242
237 3 AXIS ADVISORS, supra note 198 at 9. 238 Id. The market-based acquisition cost is measured by NADAC. 239 Id. 240 Id. 241 Id. 242 Id.
47
Figure 5243
While the chart demonstrates that New York managed care was overpaying for
Aripiprazole 5mg, it does not depict how the spread was being distributed—whether PBMs were
paying pharmacies above-market charges for Aripiprazole or if the PBMs were keeping the spread
as profit. To determine where the spread was going, the report collected a sample of average
pharmacy revenue for Aripiprazole 5mg between 2016 and 2018.
243 3 AXIS ADVISORS, supra note 198 at 10.
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Figure 6244
As shown in figure 6 above, in Q1 of 2016, sampled pharmacies received an average of
$10.92 per tablet, resulting in a gross margin of $3.89 per tablet.245 Based on the cost reported to
New York, the managed care PBMs priced Aripiprazole 5mg at $14.01 per tablet. After taking out
the $10.92 per tablet reimbursement to the pharmacy, the spread on Aripiprazole for that quarter
was $3.09 per tablet.246
244 3 AXIS ADVISORS, supra note 198 at 10. 245 Id. 246 Id.
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Two years later, in Q1 of 2018, the PBM’s spread is nearly identical at $3.04 per tablet,
but the sampled pharmacies average reimbursement was reduced 98% to $0.21 per tablet.247 While
the trend from Q1 2016 to Q1 2018 shows that New York has recognized savings on Aripiprazole,
the analysis shows that there more potential savings to be had. Further, it appears that any savings
the State had realized was financed primarily through reduction in the sampled pharmacy’s
reimbursement, which is negotiated and controlled by the PBMs.248
VI. Oversight of Pharmacy Benefit Managers in New York State
Official oversight of PBMs operating within New York State is minimal. Currently, PBMs in
New York are treated as Independent Practice Associations (IPAs).249 Unlike pharmacies,
wholesalers, drug manufacturers, and health plans, PBMs are not licensed by New York State.250
While a PBM’s organizational documents are filed with, reviewed and approved by the
Department of Health, and where appropriate, the Department of Financial Services, they are not
regulated entities.251 The New York State 2019-2020 Budget, however, includes several provisions
that increase transparency and reform the practices of PBMs operating in New York.
247 3 AXIS ADVISORS, supra note 198 at 10. 248 Id. 249 Nili S. Yolin, New York (Again) Seeks to Regulate Pharmacy Benefit Managers, NATIONAL LAW
REVIEW (Mar. 15, 2019). 250 Id. 251 Id.
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VI.A. State Regulation and Oversight
To determine the extent of oversight of PBMs operating in New York State, the Committee
issued information and document requests to the New York State Department of Health and the
New York State Department of Civil Service. In these requests, the Committee sought information
relating to the authority and oversight, or lack thereof, over PBMs who contract with pharmacies
and plan sponsors in New York.
The Public Health Law of New York State does not specify a regulatory role for the New York
State Department of Health in overseeing PBMs. In its response, the New York State Department
of Health stated it does not regulate, license, or register PBMs operating within New York State.252
The Department of Health is responsible for reviewing and approving management contracts
submitted by managed care plans that delegate management functions to PBMs in order to ensure
such PBMs are complying with regulatory and statute requirements.253
PBMs are not under an obligation to provide the Department of Health with internal policies,
procedures, or standard operating procedures regarding its practices within New York State.254 In
limited circumstances, such as when a PBM is undergoing the utilization review process to become
a registered Utilization Review Agent, policy or procedure manuals may be requested to show that
a PBM is in compliance with the requirements set forth in Public Health Law Article 49 or 42 CFR
252 Response from Diana Vance, Assistant Counsel, New York State Department of Health to the New York
State Senate Committee on Investigations and Government Operations (Mar. 1, 2019). 253 Id. 254 Id.
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§ 438.255 The Department of Health does not exercise any additional authority or oversight over
PBMs.256
Public Health Law § 280-a sets forth requirements that a PBM must adhere to when contracting
with pharmacies or PSAOs. Public Health Law § 280-a requires PBMs to include specific
provisions establishing a reasonable process to appeal, investigate and resolve disputes regarding
multi-source generic drug pricing.257 Further, Public Health Law § 280-a also prohibits PBMs from
including “gag clauses” in contracts. Specifically, § 280-a prohibits PBMs from: (1) prohibiting
or penalizing a pharmacist or pharmacy for disclosing to an individual purchasing a prescription
medication information regarding the cost of the medication or the availability of any
therapeutically equivalent alternative medications; and (2) charging or collecting from an
individual a copayment that exceeds the total charges submitted by the pharmacy.258
The Department of Health stated in its response that because Public Health Law § 280-a
governs contracts between PBMs and pharmacies, the statute is essentially self-enforcing. The
Department of Health noted that although the Commissioner of Health retains general authority to
enforce New York State’s Public Health Law, § 280-a merely requires PBMs to follow a specific
process, as outlined in contractual requirements.259 The Department further stated that it has not
received any evidence that PBMs have failed to follow the processes outlined in Public Health
Law § 280-a.260
255 Id. 256 Id. 257 Id. See also N.Y. PUB. HEALTH LAW § 280-a (2019). 258 Response from Diana Vance, Assistant Counsel, New York State Department of Health to the New York
State Senate Committee on Investigations and Government Operations (Mar. 15, 2019). See also N.Y. PUB.
HEALTH LAW § 280-a (2019). If an individual pays a copayment, the pharmacy is entitled to retain the
adjudicated costs. N.Y. PUB. HEALTH LAW § 280-a (4) (2019). 259 Response from Diana Vance, Assistant Counsel, New York State Department of Health to the New York
State Senate Committee on Investigations and Government Operations (Mar. 15, 2019). 260 Id.
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The Department of Health did state, however, that it has received complaints from
pharmacies regarding unsatisfactory appeals of their MAC reimbursements for specific drugs.261
When the Department of Health receives such complaints, it contacts the PBM.262 In some
instances, PBMs were responsive to such inquiries, and adjusted the MAC reimbursements in favor
of the pharmacies; in most inquiries, however, PBMs stated to the Department of Health that the
MAC prices were valid, and made no adjustments.263
The Department of Health reiterated in its final response to the Committee that it continues
to support initiatives that would establish more accountability and transparency from PBMs.264
According to the New York State Department of Civil Service’s response to the
Committee, they do not have any authority or oversight over PBMs operating within New York
State.265
VI.B. 2019-2020 Budget
The 2019-2020 New York State Budget includes significant strides towards reforming the
practices of PBMs by eliminating spread pricing for Medicaid managed care in New York as well
as increasing transparency in the services they provide.
The Budget requires that Medicaid managed care providers that contract with PBMs for
pharmacy benefit services base their contractual agreements on a pass-through pricing model,
261 Id. 262 Id. 263 Id. 264 Id. 265 Response from J. Marc Hannibal, Acting Counsel, New York State Department of Civil Service to the
New York State Senate Committee on Investigations and Government Operations (Mar. 1, 2019).
53
rather than on a spread pricing model.266 In addition to the elimination of spread pricing, the 2019-
2020 Budget precisely delineates what a PBM can charge New York State managed care
organizations. Specifically, the Budget: (1) limits payment to a PBM for pharmacy benefit services
to “the actual ingredient costs, dispensing fees paid to pharmacies, and an administrative fee that
covers the cost of providing the services,” (2) requires PBMs to identify and disclose to the
Department of Health and the health care plan “all sources and amounts of income, payments and
financial benefits…related to its provision of and administration of services[,]” (3) requires PBMs
to identify all ingredient costs and dispensing fees paid to any pharmacy in connection with New
York State managed care, and (4) requires PBMs to make their payment model for administrative
fees available to the Department of Health and the health care plan.267 Furthermore, the Budget
requires that managed care providers also report to the Department of Health “all sources and
amounts of income, payments, and financial benefits related to the provision of pharmacy
benefits,” as well as any “administrative fees paid to cover the cost of providing” such pharmacy
services.268
Under the 2019-2020 Budget, PBMs and managed care organizations are required to revise
and resubmit their contracts to reflect the new restrictions in Section 4406-c of the Public Health
Law and Section 346-j of the Social Services Law.269
266 S1507C, 2019-2020 Sess., (N.Y. 2019). 267 Id. 268 Id. 269 Id.
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VII. Other Investigatory Findings
VII.A. Buyout Letters and a Pattern of Impropriety
During its investigation, the Committee met and spoke with numerous independent
pharmacists from across New York State. PSSNY, on behalf of its members, informed the
Committee that beginning in 2017, CVS Caremark had significantly decreased its reimbursement
rates for generic prescription medications for pharmacies across New York. Pharmacies with
reduced rates were primarily community and independent pharmacies, many of which have
expressed concerns that the reduced reimbursement rates have caused severe financial hardship,
especially when reimbursement rates do not even cover the cost of dispensing the medication.
PSSNY also shared with the Committee copies of buyout letters and emails that many of these
pharmacies received from CVS Caremark only a few months after the reduction in
reimbursements.
Shrinking reimbursement rates have resulted in dwindling profit margins, creating the difficult
option to sell their pharmacy directly to CVS Caremark’s parent corporation, CVS Health. While
the Committee was unable to prove a direct purposeful relationship between CVS Caremark
lowering its reimbursement rate and the buyout letters, there appears to be a pattern of impropriety
on behalf of CVS Caremark. Importantly, the same pattern of impropriety seen in New York was
also apparent in Arkansas.270
270 Andy Davis, Arkansas Legislator: Got Governor's Rx Vow, ARKANSAS DEMOCRAT GAZETTE (Feb. 22,
2018).
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VII.B. Good Faith Discussions with Pharmacy Benefit Managers
As part of the Committee’s investigation, the investigative team engaged in regular, voluntary
discussions with representatives from the three major PBMs as well as a drug manufacturing trade
group. The purpose of these meetings was to discuss the role both groups have in rising
prescription costs for New York consumers as well as potential, voluntary actions to help alleviate
the burden. Increased transparency, a more efficient and equitable appeal processes for
pharmacies, financial disclosures, and even potential monetary reimbursements to the State were
discussed. Unfortunately, despite the positive tenor of these meetings, the PBMs abruptly and,
without notice, pulled out of the discussions in the weeks leading up to the 2019-2020 Budget's
adoption. Based on information the Committee subsequently received, it appears other government
stakeholders interfered with the Committee's efforts upon discovering the conversations were
taking place.
VIII. Conclusion and Recommendations
It is the Committee’s opinion that the lack of transparency and oversight of PBMs has created
an environment in which PBMs are able to engage in self-dealing to the detriment of consumers
across New York State. Throughout the investigation, the Committee identified several practices
of PBMs that require further evaluation and demand enhanced transparency. Specifically, the
Committee concludes that New York State must take immediate action to regulate the practices of
spread pricing, MAC appeals, mail order operations, and reimbursements. Most significantly,
56
because of the unknown extent of spread pricing in New York Medicaid managed care, the
Committee urges the New York State Comptroller to perform a full audit of all dollars paid to
PBMs via spread pricing.
Thus, this Committee strongly urges the New York State Comptroller to conduct an audit and
evaluation of PBM practices and urges the State Legislature to enact legislation that regulates
PBMs and mandates transparency for all health plan sponsors in New York. Such legislation
should: (1) regulate the practices of spread pricing in all pharmacy benefit contracts, (2) enhance
the transparency of MAC appeals, (3) require the licensing and registration of PBMs to enhance
accountability and oversight by instituting a fiduciary duty for their clients, (4) prohibit PBMs
from mandating that patients use specialty and mail order pharmacies, (5) providing for the
adequate and transparent reimbursements for pharmacies, and (6) require PBMs to pass-through
all discounts or rebates received from drug manufacturers to its Medicaid managed care clients.
VIII.A. Audit of New York Medicaid Managed Care Pharmacy Program
It is the opinion of the Committee that PBMs are significantly overcharging New York
Medicaid managed care organizations for providing pharmacy benefit services through the use of
spread pricing. As previously discussed, spread pricing is a pricing model PBMs use in their
pharmacy benefit services contracts. The difference in the amount charged to a plan sponsor and
the amount reimbursed to the pharmacy is the spread, or the PBM profit.
In an attempt to conduct an objective evaluation, the Committee sought prescription drug
pricing information from the three PBMs discussed in this report, CVS Caremark, Express Scripts,
57
and OptumRx. The Committee gave the PBMs an opportunity to dispute the findings reported by
Bloomberg and PSSNY, however, the PBMs declined to share specific prescription drug pricing
data when requested. Thus, while the Committee cannot provide an exact estimate of how much
PBMs profited off New York Medicaid through spread pricing, the Committee is confident that
New York is gravely overpaying PBMs for prescription drug claims.
Recent studies and audits performed in other states are illuminative, and show how much other
state Medicaid programs are paying PBMs solely in spread pricing fees. In Ohio, State Medicaid
managed care was charged $224.8 million solely in spread pricing fees to PBMs in less than one
year.271 In Kentucky, PBMs reaped $123.5 million in profit from the State’s Medicaid managed
care organizations through spread pricing fees.272 In Michigan, state Medicaid plans paid PBMs
more than $64 million in spread pricing fees from 2016 to 2018.273 In 2016, PBMs nationwide
received $1.3 billion of the $4.2 billion private Medicaid insurers spent on 90 of the most common
generic drugs used by Medicaid managed care plans.274
Therefore, it is the opinion of the Committee that an audit of New York Medicaid managed
care is crucial to determine the financial impact of spread pricing on New York taxpayers. It is
crucial to conduct a full analysis of all prescription drug spending in New York Medicaid managed
care. New York State has 19 Medicaid managed care plans. Of the 19 plans, CVS Caremark
contracts with 9, Express Scripts contracts with 3, and OptumRx contracts with 2, for its pharmacy
benefit services.
271 See supra V.B. 272 Id. 273 Id. 274 The Secret Drug Pricing System Middlemen Use to Rake in Millions, supra note 36. The $1.3 billion
includes reimbursements to pharmacies for dispensing the prescription drugs.
58
While the 2019-2020 Budget eliminates spread pricing for Medicaid managed care
organizations in the future, the total profits from spread pricing is unknown. Moreover, PBMs are
still able to utilize the spread pricing model with other governmental and non-governmental health
plan sponsors. Understanding the impact spread pricing has on Medicaid managed care is crucial
to exposing the dubious practices of PBMs for all of those involved in New York’s healthcare
industry. While the Budget anticipates that eliminating spread pricing for Medicaid will save New
York taxpayers more than $43 million, according to the study conducted by PSSNY, New York
was overcharged on Medicaid managed care prescriptions by nearly $300 million.275 Importantly,
when discussing this claim with the producers of the report, the investigative team was informed
the $300 million in spread pricing fees was likely a conservative estimation given the data access
limitations of the study.
The Committee supports the Office of the State Comptroller’s decision to audit the Department
of Health to examine whether New York Medicaid managed care organizations are obtaining
pharmacy services in an economical and transparent manner.276 While the audit is still in its
scoping phase, the Committee urges the Comptroller to evaluate all Medicaid managed care plans
to accurately determine how much PBMs have been profiting off of New York taxpayers.
The Committee further urges the Office of the State Comptroller and the Department of Health
to perform an analysis to identify the costs and benefits of mandating a pass-through model in
Medicaid managed care contracts for its pharmacy services. This analysis could offer crucial
conclusions for all those who contract with PBMs for their pharmacy benefit services, not just
Medicaid managed care.
275 David Reich-Hale, Change in Medicaid Drug Pricing Could Save Taxpayers $43M, lawmakers say,
NEWSDAY (Apr. 2, 2019). 276 Letter from Paul Alois, Audit Manager, to Commissioner Howard A. Zucker, Department of Health
(Feb. 12, 2019) (on file with author).
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Evaluating both the spread pricing and pass-through models in Medicaid managed care is
imperative for New York’s healthcare industry. Those plan sponsors who contract with PBMs for
pharmacy benefit services other than Medicaid—including unions, government purchases, and
self-insured employers—may not have as much negotiating power as larger insurance companies
and managed care organizations. Moreover, they often do not have the capability or resources to
conduct evaluations to determine the best interests for their pharmacy benefit services. Therefore,
evaluating the pricing models is crucial for those plan sponsors to understand the uncertainties that
lie in contracting with PBMs for pharmacy benefit services. In the interim, the Department of
Health should work with plan sponsors in New York to ensure that pricing models reflect
reasonable costs associated with the services PBMs provide.
Lastly, the Committee strongly urges the Office of the State Comptroller or the Department of
Health to conduct, or if needed engage an independent third party to conduct an analysis of the
impact of moving Medicaid managed care pharmacy services to a fee-for-service model,277 similar
to the change West Virginia implemented in 2017, which saved the state $30 million in fees in one
year.278
277 S5923, introduced by Senator Rivera, would allow New York’s Preferred Drug Plan, which currently
administers the drug benefit for fee-for-service Medicaid, to negotiate drug prices and administer the drug
benefit for all New York Medicaid managed care recipients. This would effectively eliminate the need
for PBMs in the Medicaid system, moving the entire Medicaid pharmacy benefit to a fee-for-service
model. S5923, 2019-2020 Sen. (Ny. 2019). Due to unknown fiscal implications, the Committee
recommends the impacts of transitioning to a fee-for-service scheme should be closely analyzed. 278 Marty Schladen & Lucas Sullivan, West Virginia a Possible Model For Cheaper Prescription Drug
Prices, COLUMBUS DISPATCH (Dec. 10, 2018).
60
VIII.B. Increased Transparency in Prescription Drug Pricing
Currently, because PBMs are the sole common counterparty with health plans, pharmacies,
and drug manufacturers, the economic transactions among the parties remain unknown to anyone
other than the PBMs.279 The lack of transparency allows for PBMs to engage in self-dealing
practices, such as spread pricing, to the financial detriment of their clients. The status quo allows
PBMs to hide what they pay for prescriptions from their own clients. It is the opinion of the
Committee that the lack of transparency and lack of regulation of PBMs operating in New York
must be addressed.
Plan sponsors, including Medicaid managed care organizations and private employers, that
contract with PBMs should insist on provisions of pricing transparency, reporting, and audit rights
in their pharmacy service contracts. Further, contracting parties should insist on a full disclosure
of cash flows to and through the PBM that is administering the pharmacy benefit services of their
health plan. Preserving the right to audit and inspect pricing is crucial to keeping PBMs
accountable to their health plan clients. Additionally, PBMs should be required to disclose any and
all price discounts or rebates they receive from drug manufacturers as well as any agreements
made between the parties for those discounts. S2087, introduced by Senator Rivera, directly
addresses these concerns. S2087 includes provisions requiring PBMs to account for any funds
received by the PBM relating to its provision of pharmacy benefit services.280 Moreover, S2087
allows for health plans to have access to all financial and utilization information from the PBM
279 Garett & Garis, supra note 26, at 61. 280 S2708, 2019-2020 Sen. (Ny. 2019).
61
relating to the services it provides for the health plan.281 The Committee urges the Senate to pass
S2087.
PBMs may claim that legislating increased transparency legislation will harm prescription drug
prices by reducing the discounts that the PBMs are able to negotiate on behalf of health plans.
However, economists generally agree that transparent pricing will ensure the survival of the best
firms and will result in lower prices as the firms compete with each other for market share.282
S1705, introduced by Senator Sepulveda, provides for enhanced transparency of PBMs to the
entities that contract with them. Also referred to as the “Pharmacy Benefit Manager Transparency
Act,” S1705 requires a PBM under contract with a covered entity submit to the covered entity
financial data related to its pharmacy benefit services. Specifically, the bill requires a PBM to
submit for the previous year: (1) the wholesale acquisition cost for each drug on its formulary and
the total number of prescriptions that were dispensed, (2) the amount of rebates, discounts, and
prices concessions the PBM received for each drug on its formulary and the amount that were
passed through to the covered entity, (3) the amount of any fee received from a manufacturer, (4)
the nature, type, and amount of all other payments that the PBM received from a manufacturer in
connection with the services it provides, and (5) the amount of any reimbursements the PBM pays
to pharmacies as well as the negotiated price covered entities pay the PBM for each drug on its
formulary.
S1705 currently remains in the Senate Insurance Committee. Given the many positive impacts
of S1705, the Committee urges its passage.
281 Id. 282 Garett & Garis, supra note 26, at 61.
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VIII.C. Increased Transparency of Appeals in Public Health Law § 280-a
As discussed infra, Public Health Law § 280-a sets forth requirements that a PBM must follow
in adjudicating maximum allowable cost or MAC appeals. Current law mandates that if a PBM
determines an appeal to be valid, “the maximum allowable cost for the drug shall be adjusted for
the appealing pharmacy as of the date of the original claim for payment.”283 However, if an appeal
is denied, § 280-a only mandates that a PBM identify “a therapeutically equivalent drug […] that
is available for purchase by pharmacies in this state from wholesalers […] at a price which is
equal to or less than the maximum allowable cost for that drug as determined by the pharmacy
benefit manager.”284 There is no requirement in law that a PBM provide any justification or
explanation for its denial of a MAC appeal. While PBMs may internally decide to give such an
explanation, most of these justifications are blanket responses that give little or no insight
regarding their denial. It is the opinion of the Committee that § 280-a be amended to allow for a
more transparent appeal processes for pharmacies. This is critical given the persistent decrease in
reimbursement rates for pharmacies in recent years.
VIII.D. Licensing and Registration of Pharmacy Benefit Managers
It is the opinion of the Committee that in order to hinder the anti-competitive practices of
PBMs, it is crucial to license and register PBMs operating in New York State. S2087, introduced
283 N.Y. PUB. HEALTH LAW § 280-a (2019). 284 Id.
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by Senator Rivera and currently in the Senate Committee on Health, would license PBMs operating
in New York State and specify their duties and obligations as service providers to their clients.
S2087 will amend Public Health Law § 280 to provide that PBMs have a fiduciary relationship
with, and a duty to their clients to “perform pharmacy benefit management with care, skill,
prudence, diligence, and professionalism.” Further, it requires that all funds received by PBMs
belong to the client other than any administrative fee or payment expressly delineated in the
contract.
Importantly, S2087 requires that PBMs be licensed by the Department of Health, and gives the
Commissioner of the Department of Health the authority to revoke, or refuse to issue or renew, a
PBM’s license if, in their judgment, the PBM is not trustworthy or competent to act as a PBM in
New York State. Again, the Committee strongly urges the Senate to pass S2087.
VIII.E. Regulation of Mail Order Pharmacies
As previously discussed, PBMs also own—and profit from—mail order pharmacies that
operate as automated dispensing facilities. While some may appreciate the convenience of mail
order prescriptions, the closed-environment of a PBM mail order pharmacy often does not deliver
the value-added benefits of a traditional pharmacy. For many patients, especially those with
complex medical conditions, the safe and secure delivery of prescriptions is crucial to their care.
Those with specific treatment regimens can be disrupted if prescriptions are not promptly received.
Importantly, access to local pharmacies for medications can be essential, especially for those that
require the in-person counseling of a pharmacist. Furthermore, vertically integrated mail order
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pharmacies can undermine patient choice by forcing patients to use their preferred distributors or
drug manufacturers. It is the opinion of the Committee that the decision to receive pharmacy
benefits from a retail pharmacy rather than a mail order pharmacy should be made between the
patient and their prescriber.
A347, introduced by Assemblywoman Joyner, speaks directly to this crucial and personal
decision-making process. A347 expands the Insurance Law of New York §§ 3216, 3321 and 4303
to ensure that a prescriber, considering all factors relevant to the patient, can determine when mail
order is or is not appropriate.285 Furthermore, A347 ensures cost security by requiring the retail
pharmacy to agree to the same reimbursement amount before finalizing the prescribers’
determination.286
S4463, introduced by Senator Breslin, is also crucial in limiting PBM’s operations of mail
order pharmacies, while enhancing patient’s access to vital medications and care.287 It is the
opinion of the Committee that consumers should have the freedom to choose where and how to
receive their covered medications. While legislation in 2012 attempted to guarantee this important
choice, consumers in New York continue to be directed away from their local pharmacies, and are
forced to receive their medications from out-of-state specialty pharmacies. Thus, ensuring patient
choice in obtaining their covered medications is crucial.
Importantly, S4463 strengthens current Insurance Law to ensure that patients have the option
to access every covered medication from a local network participating pharmacy or a specialty
285 A347, 2019-2020 Assemb. (Ny. 2019). 286 Id. 287 S4463, 2019-2020 Sen. (Ny. 2019).
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pharmacy.288 Furthermore, it prohibits a health plan from requiring a higher co-payment for a
prescription dispensed by a network retail pharmacy than a specialty network pharmacy.289
The Assembly version of this bill, A3043, introduced by Assemblywoman Joyner, passed the
Assembly on May 6, 2019.290 The Committee urges the Senate to pass this bill.
VIII.F. Adequate and Transparent Reimbursement
As prescription drug costs rise, consumers are paying more at the counter and pharmacies are
being reimbursed at lower rates, with the majority of the spread being reaped as profit by PBMs.
For pharmacies across the United States, reimbursements are dwindling, making it harder for
pharmacies to turn a profit. While a pharmacy’s revenue includes over-the-counter products,
vitamins, cosmetics, groceries, and other merchandise, a typical independent pharmacy generates
more than 90 percent of its revenues from prescriptions.291
Local, independent community pharmacies, especially those in rural areas, are steadily closing.
In 2011, there were 23,106 independent pharmacies across the United States; by 2017, only 21,909
independent pharmacies remained.292 Independent community pharmacies care for underserved
populations; 75 percent of independent pharmacies are situated in communities with less than
50,000 people. 293 Approximately 1,800 rural independent pharmacies in the United States serve
288 Id. 289 Id. 290 A3043, 2019-2020 Assemb. (Ny. 2019). 291 Adam J. Fein, Ph.D., New Data: Pharmacy Owners’ Profits Fall As Industry Competition Rises, Drug
Channels (Jan. 9, 2018). 292 Karen Appold, Independent Pharmacies: Not Dead Yet, 163 DRUG TOPICS 1 (Jan. 12, 2019). 293 Press Release, NCPA Releases 2018 Digest, NATIONAL COMMUNITY PHARMACIES ASSOCIATION
(Oct. 8, 2018).
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as the only pharmacy provider in their community.294 For many patients especially in rural areas,
independent community pharmacies are a critical—and often the only—source of medications and
clinical services. In rural communities, pharmacies assist patients with numerous services such as
medication counseling, blood pressure and glucose monitoring, immunizations, consultation, and
over-the-counter medications.295 Closures are leaving vulnerable populations with limited ability
to obtain medication and other crucial health services. From 2003 to 2018, 1,238 independently
owned rural pharmacies around the country closed their doors.296 During that period, 302 rural
communities lost all but one local pharmacy.297
Independent pharmacies are especially susceptible to closure because they are faced with
particular financial challenges—including low reimbursements—because of their limited
negotiating power and a greater reliance on prescription drug sales as a predominant source of
revenue.298 Below-cost reimbursements significantly contribute to declines in an independent
pharmacy’s revenue. According to the Independent Pharmacy Association, independent
pharmacies are often reimbursed less than what they paid for drugs.299 For a Fentanyl Patch 100,
CVS Caremark reimbursed its own CVS pharmacies $400.65, while independent pharmacies were
reimbursed $75.74.300 Similarly, for Amoxicillin, CVS pharmacies were reimbursed $39.92, while
294 Independent Pharmacy Today, NATIONAL COMMUNITY PHARMACIES ASSOCIATION. 295 Abiodun Salako, Fred Ullrich, & Keith J. Mueller, Rural Policy Brief: Update: Independently Owned
Pharmacy Closures in Rural America, 2003-2018, RURAL POLICY RESEARCH INSTITUTE 1 (July 2018). 296 Id. 297 Paulina Firozi, The Health 202: Here’s Why Rural Independent Pharmacies are Closing Their Doors,
THE WASHINGTON POST (Aug. 23, 2018). 298 Id. 299 Id. 300 Linette Lopez, What CVS is Doing to Mom-and-Pop Pharmacies in the US Will Make Your Blood
Boil, BUSINESS INSIDER (Mar. 30, 2019).
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independent pharmacies were reimbursed only $12.21.301 In a study from Arkansas, many
pharmacists stated they were not reimbursed enough to cover the cost of filling prescriptions.302
Therefore, it is the opinion of the Committee that legislation ensuring pharmacy
reimbursements at the very least cover the cost to dispense is crucial to combat the anti-competitive
practices of PBMs that are impacting independent community pharmacies across New York.
VIII.G. Mandate All Reimbursements are Passed Back to Medicaid Clients
As discussed, PBMs negotiate with drug manufactures on behalf of their clients for rebates and
discounts on prescription medications dispensed through their pharmacy benefit plans. Rebates are
paid to PBMs after the point of sale, and can make up 40 percent or more of a prescription drug’s
list price.303 While PBMs allege they pass much of the discount back to its clients, they often keep
some of the savings as revenue.304 Importantly, with the exception of new provisions for Medicaid
under the 2019-2020 Budget, PBMs are not required to disclose rebate information to their clients.
While some PBMs plan to institute rebate pass-through “assurances” in the near future, such
programs are not required by New York State law, and therefore are not guaranteed. The
Committee recommends the introduction of legislation that requires all PBMs providing pharmacy
benefit services to New York State Medicaid managed care organizations to pass back 100 percent
of all rebates, discounts, and price concessions given to them by drug manufacturers.
301 Id. 302 Id. 303 See supra III.F. 304 Id.